Heineken Malaysia Berhad - Missed Ours, Within Market

9M18 earnings of RM182.5m (+4% YoY) was within market’s but missed our estimates due to higher-than-expected operating costs. The absence of dividends was as expected. We anticipate down trading to more affordable products as premium offerings could be losing traction from higher prices. This could worsen if speculations for higher excise duties materialise. Maintain MP with a lower TP of RM18.60 (from RM20.40) as we cut earnings.

9M18 within market’s but below our expectations. 9M18 net earnings of RM182.5m missed our expectations but is deemed to be within consensus, accounting for 61% and 65% of respective estimates. While 4Qs are expected to be seasonally stronger (4Qs typically make up 35% of full year) following year-end celebrations and pre-CNY front loading and 3Q18 sales coming in within our assumptions, operating expenses appear higher-than-expected. This is possibly due to greater marketing spend incurred to stimulate market demand from higher SST-led prices. The absence of dividend is within expectations.

YoY, 9M18 turnover of RM1.37b (+7%) improved thanks to higher volume growth, potentially from the off-trade segment where there is a growing demand for less premium brands. Several rounds of price adjustments (first in April 2018 and second in September 2018 from SST) could have induced forward buying before the changes were implemented. Group EBIT registered weaker at RM237.1m (-2%), resulted from the abovementioned poorer product mix added by higher marketing spend incurred (EBIT margins recorded at 17.3%, -1.5ppt). However, thanks to lower effective taxes of 22.5% (-4.0ppt), 9M18 net profits closed at RM182.5m (+4%).

QoQ, 3Q18’s 22% sales growth to RM512.0m is possibly charged by higher consumption during the 2018 Wold Cup period and lower prices during the “tax-holiday” period in July-August 2018. EBIT expanded by 34%, which could have also come from savings from the group’s streamlined procurement processes. Net earnings of RM78.9m (+44%) was stretched further following lower 3Q18 effective taxes of 19.3% (- 6.0ppt).

People are still drinking. Headwinds abound with the reintroduction of SST leading up to higher prices of alcohol, primarily for on-trade consumers (i.e. at F&B establishments). Although this looks to undermine consumption, particularly for premium offerings, consumers could potentially down trade towards more affordable options while leaning towards more off-trade purchasing. Both are lower margin channels for brewers. Still, we do not anticipate a significant loss of volume sales due to the sticky demand of alcoholic beverages. For HEIM at least, operational cost savings could allow for more marketing coverage to coax demand without too much of a loss in margins from the above.

Post-results, we trim our FY18E-19E earnings assumptions by 8.6% for both years in anticipation of higher marketing spending needed to sustain market demand. This translated to lower dividend expectations to 90.0- 93.0 sen from 98.0-100.0 sen. While we leave our topline expectations unchanged for now, we do not discount the possibility of downward adjustments from any unfavourable developments in excise duties from the coming Budget 2019 announcements.

Maintain MARKET PERFORM but lower TP to RM18.60 (from RM20.40). Our target price is revised to a lower EPS on our unchanged 20.0x FY19E PER, in line with the stock’s 5-year mean. Against CARLSBG (UP, TP: RM17.10), HEIM is valued above its peer’s valuation of 19.0x FY19E PER. We believe this is fair given HEIM’s larger domestic market share and better dividend yields.